Schroders Quickview: Brazilian recovery will take time and luck

Economic growth in Brazil should improve further if reform progress is made, although it is likely to plateau at a low level next year.

2 June 2016

Craig Botham

Emerging Markets Economist

Brazil's first quarter GDP growth of -5.4% year-on-year sounds devastatingly bad, but such is the state of the Latin American economy that it is actually an improvement.

The figures were better compared both to expectations and to last quarter’s performance. Still, -5.4% is hardly cause for celebration, and 2016 will not be a banner year for the economy.

A breakdown of the data reveals that the improvement was driven by stronger government spending, net exports, and investment. Government spending is unlikely to be much of a driver going forward given planned austerity, and this increase at least partially reflects the attempts by the outgoing president, Dilma Rousseff, to shore up support with largesse for her base.

The contribution of net exports, boosted almost entirely by better export performance, can be attributed to the weaker currency and lower unit labour costs. This should persist for most of the third quarter, after which the currency impact will begin to fade.

Perhaps most interesting though is the performance of investment. Although still contracting, it was much less of a drag than in the fourth quarter.

When we also consider a rebound in business confidence witnessed in survey data, we could conclude that the formation of a new government has returned investment confidence to the economy.

If this narrative is correct, the revival is somewhat hostage to further political developments. Unfortunately, President Temer’s government has hit a few stumbling blocks already, raising the risk of a reversal in this tentative recovery.

For now, we think there is sufficient political incentive for the passage of limited reforms, and consequently this recovery should extend, but plateau at a low level next year. However, if the Temer government’s struggles become more serious, we will have to reassess our view.

Topics:

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.
To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

In this month's infographic our economists investigate globalisation and ask is it in crisis? They look at whether China's problems are building and if deflation or inflation should be of greater concern to investors.